Energy grid investment might seem like a rather dry subject, but it is a huge priority for African countries. Some 80% of the 54 energy sector projects listed by the African Union’s programme for infrastructure development are ‘Power Interconnector’ projects. If implemented, they will support the Continental Power System Master Plan, plans for an Africa Single Electricity Market and the development of smart grids.

But attracting finance into grids has not been easy and Africa is behind. For instance, the African Development Bank calculated central grid losses on the continent due to a lack of transmission infrastructure at 16% in 2018, almost seven percentage points higher than the average losses observed in other developing countries. The challenges arise for the African region for several reasons.

First, the continent has to compete with other countries and regions wanting to invest in electricity grids, many of whom have higher levels of industrialisation and therefore consistent and large demand. According to the International Energy Agency (IEA), global investments in electricity grids need to average $600bn per year up to 2030 to support the global energy transition and align with the net-zero scenario. However, in reality, between 2015 and 2021, average annual investment levels in electricity grids were half of this — at $300bn, and of this, the 100 or so ‘emerging market and developing economies’ took up just 26%. Transformation of a continent’s energy connection infrastructure, on a continent around three times the size of China or the US, yet with a small proportion of industry, is no simple feat.

Second, many commentators suggest policy reform and regulation is needed on the continent to attract more investors into smart energy on the continent. However, the current regulatory environment exists for good reason. Many African countries have energy systems managed by state-owned enterprises to avoid monopoly power being exercised. Given the public good properties of energy, governments often try to regulate prices to ensure access for poor populations. Most countries are at early stages of formulating country-wide policy frameworks for smart grids beyond pilots, such as Kenya, Nigeria, and others.

Third, current business models for distribution and transmission value energy simply as a commodity — a revenue stream on its own. This means energy investors will more willingly invest in power stations than distribution, and will avoid only investing in residential areas for instance, which forms much of Africa’s current demand. Moreover, African countries are simply purchasers of technology in this area. Just ten countries worldwide own approximately 95% of all patented technologies relevant to smart grids — the top three of which being China, Japan and the US. The costs of imports and logistics means capital expenditure will typically be higher on the continent.

So what’s the answer? International grants and loans can help to subsidise transmission to some degree. Multilaterals such as the World Bank have placed an emphasis on public–private business models to attract investment. However, these and similar initiatives may not succeed, as they do not link well with existing models of management, nor towards government objectives and realities on the continent. 

The answer may well be to rethink business models — to focus on investing in industry and transmission at the same time, as a means to generate future revenue streams. While Arab and Asian markets may have ideas for new business models, my feeling is that if African countries can be at the forefront of mobile payments, which they were with Kenya’s Mpesa, innovation in distribution models may well be generated internally too. This space is worth watching closely.

Hannah Wanjie Ryder is the CEO of consultancy Development Reimagined and senior associate at the Center for Strategic International Studies Africa Program. 

This article first appeared in the April/May 2023 print edition of fDi Intelligence.